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The Impact of Cutting Social Security Cost of Living Adjustments on the Living Standards of the Elderly

Author

Listed:
  • Dean Baker
  • David Rosnick

Abstract

During the negotiations over raising the debt ceiling, President Obama proposed cutting the annual cost of living adjustment for Social Security by switching to an index that would show a lower measured rate of inflation. This alternative index, the chained consumer price index (CCPI-U), shows an annual rate of inflation that averages approximately 0.3 percentage points less than the consumer price index (CPI-W) that is currently used to index benefits. While this change would lead to $122 billion in savings to the government over the next decade, it also means that beneficiaries would receive lower benefits. Since the vast majority of retirees rely on Social Security for the bulk of their retirement income, this cut in the cost of living adjustment would imply a substantial reduction in the standard of living of retirees, unless they offset it by saving more during their working years or retiring later in life. While we cannot know for sure how workers in future years will adjust their behavior, this paper assesses their past response to changes in the cost of living adjustment. It finds that they were not able to raise their non-Social Security income in response to cuts in Social Security benefits.

Suggested Citation

  • Dean Baker & David Rosnick, 2011. "The Impact of Cutting Social Security Cost of Living Adjustments on the Living Standards of the Elderly," CEPR Reports and Issue Briefs 2011-20, Center for Economic and Policy Research (CEPR).
  • Handle: RePEc:epo:papers:2011-20
    as

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    File URL: http://www.cepr.net/documents/publications/ss-cola-2011-09.pdf
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    References listed on IDEAS

    as
    1. Congressional Budget Office, 2011. "CBO's 2011 Long-Term Projections for Social Security: Additional Information," Reports 41644, Congressional Budget Office.
    2. Shawn Fremstad, 2010. "A Modern Framework for Measuring Poverty and Basic Economic Security," CEPR Reports and Issue Briefs 2010-12, Center for Economic and Policy Research (CEPR).
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    social security; retirement; COLA; CPI;

    JEL classification:

    • H - Public Economics
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J - Labor and Demographic Economics
    • J1 - Labor and Demographic Economics - - Demographic Economics
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination

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